Options Strategies

quick guide
OIC is providing this publication for
informational purposes only. No statement
in this publication is to be construed as
furnishing investment advice or being a
recommendation, solicitation or offer to
buy or sell any option or any other security.
Options involve risk and are not suitable
for all investors. OIC makes no warranties,
expressed or implied, regarding the
completeness of the information in this
publication, nor does OIC warrant the
suitability of this information for any
particular purpose. Prior to buying or selling
an option, you must receive a copy of
Characteristics and Risks of Standardized
Options. Copies of this document may be
obtained from your broker, from any
exchange on which options are traded,
by calling 1-888-OPTIONS (678-4667), or
by visiting www.OptionsEducation.org.
ABOUT OIC

The Options Industry Council (OIC) was formed in 1992 as a unified

industry effort to educate individual investors about the benefits and
risks of exchange-traded options. OIC conducts hundreds of seminars,
distributes educational brochures, maintains a website and offers live
help from options professionals. The goal of OIC, comprised of the U.S.
options exchanges and OCC, is to increase the awareness, knowledge and
responsible use of exchange-listed equity options among a global
audience of investors—including individuals, financial advisors and
institutional managers—by providing independent, unbiased education
and practical knowledge.

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 Each strategy has an
accompanying graph showing
profit and loss at expiration.
• The vertical axis shows the
HOW TO USE THIS BOOK profit/loss scale.
• When the strategy line is below
the horizontal axis, it assumes
you paid for the position or
had a loss. When it is above
the horizontal axis, it assumes
you received a credit for the
position or had a profit.
profit • The dotted line indicates the
+ strike BEP
strike price.
price • The intersection of the strategy
line and the horizontal axis
is the break-even point (BEP)
stock
price not including transaction
costs, commissions, or margin
(borrowing) costs.
• These graphs are not drawn
- to any specific scale and are
loss meant only for illustrative
and educational purposes.
• The risks/rewards described are
generalizations and may be
lesser or greater than indicated.
TERMS AND DEFINITIONS

Break-Even Point (BEP): The stock price(s) at which an option

strategy results in neither a profit nor loss.
Call: An option contract that gives the holder the right to buy
the underlying security at a specified price for a certain, fixed
period of time.
In-the-money: A call option is in-the-money if the strike price is
less than the market price of the underlying security. A put option
is in-the-money if the strike price is greater than the market
price of the underlying security.
Long position: A position wherein an investor is a net holder in a
particular options series.
Out-of-the-money: A call option is out-of-the-money if the strike
price is greater than the market price of the underlying security.
A put option is out-of-the-money if the strike price is less than
the market price of the underlying security.
Premium: The price a put or call buyer must pay to a put or call
seller (writer) for an option contract. Market supply and demand
forces determine the premium.
Put: An option contract that gives the holder the right to sell
the underlying security at a specified price for a certain, fixed
period of time.
Ratio Spread: A multi-leg option trade of either all calls or all
puts whereby the number of long options to short options is
something other than 1:1. Typically, to manage risk, the number
of short options is lower than the number of long options
(i.e. 1 short call: 2 long calls).
Short position: A position wherein the investor is a net writer
(seller) of a particular options series.
Strike price or exercise price: The stated price per share for which
the underlying security may be purchased (in the case of a call)
or sold (in the case of a put) by the option holder upon exercise of
the option contract.
Synthetic position: A strategy involving two or more instruments
that has the same risk/reward profile as a strategy involving only
one instrument.
Time decay or erosion: A term used to describe how the time value
of an option can “decay” or reduce with the passage of time.
Volatility: A measure of the fluctuation in the market price of the
underlying security. Mathematically, volatility is the annualized
standard deviation of returns.
Bull Strategies
Bull Strategies
bull strategy LONG CALL

Example: Buy call

profit
Market Outlook: Bullish +
Risk: Limited
Reward: Unlimited
Increase in Volatility:
Helps position stock
price
Time Erosion: Hurts position
BEP: Strike price plus
premium paid
-
loss
bull strategy BULL CALL SPREAD

Example: Buy 1 call;

profit
sell 1 call at higher strike
Market Outlook: Bullish
+
Risk: Limited
Reward: Limited
Increase in Volatility: stock
price
Helps or hurts depending
on strikes chosen
Time Erosion: Helps or hurts
depending on strikes chosen
-
BEP: Long call strike plus loss
net premium paid
bull strategy BULL PUT SPREAD

Example: Sell 1 put;

profit
buy 1 put at lower strike with
same expiry +
Market Outlook:
Neutral to bullish
Risk: Limited stock
Reward: Limited price

Increase in Volatility:
Typically hurts position slightly
Time Erosion: Helps position
-
BEP: Short put strike minus loss
credit received
bull strategy COVERED CALL/BUY WRITE

Example: Buy stock; sell calls

profit
on a share-for-share basis
Market Outlook: Neutral to
+
slightly bullish
Risk: Limited, but substantial
(risk is from a fall in stock price) stock
Reward: Limited price

Increase in Volatility:
Hurts position
Time Erosion: Helps position
-
BEP: Starting stock price minus loss
premium received
bull strategy PROTECTIVE/MARRIED PUT

Example: Own 100 shares of

profit
stock; buy 1 put
Market Outlook: Cautiously
+
bullish
Risk: Limited
Reward: Unlimited stock
price
Increase in Volatility:
Helps position
Time Erosion: Hurts position
BEP: Starting stock price -
plus premium paid loss
bull strategy CASH-SECURED SHORT PUT

Example: Sell 1 put; hold cash

profit
equal to strike price x 100
Market Outlook: Neutral to
+
slightly bullish
Risk: Limited, but substantial
Reward: Limited stock
price
Increase in Volatility:
Hurts position
Time Erosion: Helps position
BEP: Strike price minus -
premium received loss
Bear Strategies
Bear Strategies
bear strategy LONG PUT

Example: Buy put

profit
Market Outlook: Bearish +
Risk: Limited
Reward: Limited, but substantial
Increase in Volatility:
Helps position stock
price
Time Erosion: Hurts position
BEP: Strike price minus
premium paid
-
loss
bear strategy BEAR PUT SPREAD

Example: Sell 1 put;

profit
buy 1 put at higher strike
Market Outlook: Bearish
+
Risk: Limited
Reward: Limited
Increase in Volatility: stock
price
Helps or hurts depending on
strikes chosen
Time Erosion: Helps or hurts
depending on strikes chosen
-
BEP: Long put strike minus loss
net premium paid
bear strategy BEAR CALL SPREAD

Example: Sell 1 call;

profit
buy 1 call at higher strike
Market Outlook:
+
Neutral to bearish
Risk: Limited
Reward: Limited stock
price
Increase in Volatility:
Typically hurts position slightly
Time Erosion: Helps position
BEP: Short call strike plus -
credit received loss
Neutral Strategies
Neutral Strategies
neutral strategy COLLAR

Example: Own stock, protect

by purchasing 1 put and selling profit
1 call with a higher strike
+
Market Outlook: Neutral
Risk: Limited
Reward: Limited
stock
Increase in Volatility: Effect price
varies, none in most cases
Time Erosion: Effect varies
BEP: In principle, breaks even
if, at expiration, the stock is -
above/(below) its initial level by loss
the amount of the debit/(credit)
neutral strategy SHORT STRADDLE

Example: Sell 1 call;

sell 1 put at same strike profit
Market Outlook: Neutral +
Risk: Unlimited
Reward: Limited
Increase in Volatility: stock
Hurts position price
Time Erosion: Helps position
BEP: Two BEPs
1. Call strike plus premium
received -
2. Put strike minus premium loss
received
neutral strategy SHORT STRANGLE

Example: Sell 1 call with higher

strike; sell 1 put with lower strike profit
Market Outlook: Neutral +
Risk: Unlimited
Reward: Limited
Increase in Volatility: stock
Hurts position price
Time Erosion: Helps position
BEP: Two BEPs
1. Call strike plus premium
received -
2. Put strike minus premium loss
received
neutral strategy IRON CONDOR

Example: Sell 1 call; buy 1 call at

higher strike; sell 1 put; buy 1 put
at lower strike; all options have
the same expiry. Underlying price profit
typically between short call and
short put strikes. +
Market Outlook: Range bound
or neutral
Risk: Limited stock
price
Reward: Limited
Increase in Volatility:
Typically hurts position
Time Erosion: Helps position -
BEP: Two BEPs loss
1. Short call strike plus credit
received
2. Short put strike minus credit
received
neutral strategy CALENDAR SPREAD

Example: Sell 1 call; buy 1 call

at same strike but longer expiration;
also can be done with puts
Market Outlook: Near term neutral profit
(if strikes = stock price); can be +
slanted bullish (with OTM call
options) or bearish (with OTM
put options)
Risk: Limited stock
price
Reward: Limited; substantial
after near term expiry
Increase in Volatility:
Helps position
Time Erosion: Helps until near
-
loss
term option expiry
BEP: Varies; after near term
expiry long call strike plus debit
paid or (if done with puts) short
put strike minus debit paid
neutral strategy COVERED COMBINATION/COVERED STRANGLE

Example: Own stock; sell one call;

sell one put; underlying price
typically between short call and
short put strikes profit
Market Outlook: Range bound +
or neutral, moderately bullish;
willing to buy more shares and
sell existing shares
Risk: Limited, but substantial stock
price
Reward: Limited
Increase in Volatility: Typically hurts
position
Time Erosion: Typically hurts position -
BEP: Two BEPs loss
1. Short call strike plus total credit
2. Short put strike minus total credit
neutral strategy LONG CALL BUTTERFLY

Example: Sell 2 calls;

buy 1 call at next lower strike;
buy 1 call at next higher strike
(the strikes are equidistant) profit
Market Outlook: Neutral around +
strike
Risk: Limited
Reward: Limited
stock
Increase in Volatility: price
Typically hurts position
Time Erosion: Typically helps position
BEP: Two BEPs
1. Lower long call strike plus -
net premium paid loss
2. Higher long call strike minus
net premium paid
Volatility Strategies
Volatility Strategies
volatility strategy LONG STRADDLE

Example: Buy 1 call;

profit
buy 1 put at same strike
Market Outlook: Large move
+
in either direction
Risk: Limited
Reward: Unlimited stock
price
Increase in Volatility:
Helps position
Time Erosion: Hurts position
BEP: Two BEPs -
1. Call strike plus premium paid loss
2. Put strike minus premium paid
volatility strategy LONG STRANGLE

Example: Buy 1 call with higher

strike; buy 1 put with lower strike
profit
Market Outlook: Large move
in either direction +
Risk: Limited
Reward: Unlimited
Increase in Volatility: stock
Helps position price

Time Erosion: Hurts position

BEP: Two BEPs
1. Call strike plus premium paid
2. Put strike minus premium paid -
loss
volatility strategy CALL BACKSPREAD

Example: Sell 1 call;

buy 2 calls at higher strike
profit
Market Outlook: Bullish
Risk: Limited
+
Reward: Unlimited
Increase in Volatility:
Typically helps position stock
price
Time Erosion:
Typically hurts position
BEP: Varies, depends if
established for a credit or debit.
If done for a credit, two BEP’s -
with the lower BEP being the loss
short strike plus the credit
volatility strategy PUT BACKSPREAD

Example: Sell 1 put;

buy 2 puts at lower strike
profit
Market Outlook: Bearish
Risk: Limited
+
Reward: Limited, but substantial
Increase in Volatility: Typically
helps position stock
price
Time Erosion: Typically
hurts position
BEP: Varies, depends if
established for a credit or debit.
If done for a credit, two BEP’s -
and the lower BEP is the short loss
strike minus the credit
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